Grade 12 Business Studies Project - Draft

 Import, Export and The Global Supply Chain

INTRODUCTION

The past few decades have seen important shifts that have reshaped the global trade landscape. As a share of global output, trade is now at almost three times the level in the early 1950s, in large part driven by the integration of rapidly growing emerging market economies (EMEs). The expansion in trade is mostly accounted for by growth in non-commodity exports, especially of high-technology products such as computers and electronics. It is also characterized by three important trends: the rise of EMEs as systemically important trading partners; the growing role of global supply chains; and an ongoing shift of technology content toward dynamic EMEs. These developments in global trade have been associated with increased trade interconnectedness and carry important implications for trade patterns, in particular in response to relative price changes. The aim of this paper is to outline the factors underlying these changes and analyse their implications for the outlook for global trade patterns.

Several factors underlie the expansion in global trade and increased interconnectedness. Although trade liberalization since the early 1950s has certainly contributed by lowering trade barriers first in advanced economies and more recently in many developing countries, an equally important factor was the growth in vertical specialization in production and the emergence of global supply chains. Technology-led declines in transportation and communication costs allowed the fragmentation of production processes along vertical trading chains that stretch across several countries. Intermediate goods therefore cross borders multiple times before being transformed into final products, as each country specializes in particular stages of a good’s production sequence. Regional production networks thus emerged whose reach eventually became global. An important implication of this phenomenon is that countries that are part of a global supply chain are expected to have a higher share of imported content in their exports because their exports rely on importing intermediate inputs from other supply chain partners. The extent of imported inputs in a country’s exports is a useful indicator of whether it is “downstream” (i.e., engaging heavily in assembly and processing activities) or “upstream” in the supply chain (i.e., hub).

Advanced countries and EMEs play different roles in global supply chains. Advanced economies tend to be upstream in the supply chain. This position is reflected in relatively small foreign contents in their exports and relatively large contributions toward other downstream countries’ exports. In contrast, EMEs tend to be downstream in the supply chain, with relatively large shares of imported content in their exports. The extent of foreign content in exports of advanced countries and EMEs has important and contrasting implications for the sensitivity of trade patterns to relative price changes.

The growing role of global supply chains is associated with increased trade interconnectedness. Network-based analysis illustrates several trends taking place over the past decade, most notably the emergence of China, along with the United States, as major systemically important trading hubs. This not only reflects the size of trade but also the increase in the number of its significant trading partners. Importantly, there is almost a perfect overlap between countries hosting both systemically important trade and financial centres. These countries could constitute a natural focus for risk-based surveillance on cross- border spill overs and contagion.

The process of globalization has got momentum through the process of economic integration, and in the expansion of the volume of International Trade. India has been a relatively new comer to the process of expansion of international trade since its opening up to world trade only began after the crisis in 1991. The opening up to international trade should be seen as a crucial aspect of the new approach to economic Policy and as an integral part of the process of reforms. In 1991, the government introduced some changes in its Policy on trade, foreign Investment, Tariffs and Taxes under the name of "New Economic Reforms". The economic reforms process introduced since 1991 with focus on liberalization, openness, transparency and globalization has enabled increased integration of the Indian economy with the rest of world. The growth rate of India’s trade is increasingly dependent on exogenous factors such as world trade growth (especially those of the trading partners), international price changes and development in the competitor countries. Cross currency exchange rates as well as dollar rupee exchange rate movements also get reflected in the performance of India’s trade. Indian exports have come a long way from the time of independence in terms of value. The total value of India’s merchandise exports increased from US $ 1.3 billion in 1950-51 to US $ 63.8 billion in 2003-04 – a compound rate of 7.6 per cent .Indian economy and foreign trade has shown progress post liberalization. In contrast to the pre-reform period (1950-90), the actual growth of exports in the post-reform period has been above the potential offered by the growth of world demand. The gap between the actual and potential is mainly explained by an improvement in the overall competitiveness of India’s exports. The composition of India's foreign trade has undergone substantial changes, particularly, after the liberalization and globalization. Our major exports now includes manufacturing goods such as Engineering Goods, Petroleum Products, Chemicals and allied Products, Gems and Jewelleries, Textiles, Electronic Goods, etc. which constitute over 80 per cent of our export basket.

HOW IMPORTING AND EXPORTING AFFECTS THE ECONOMY

In today’s global economy, consumers are used to seeing products from every corner of the world in their local grocery stores and retail shops. These overseas products—or imports—provide more choices to consumers. And because they are usually manufactured more cheaply than any domestically- produced equivalent, imports help consumers manage their strained household budgets. Maintaining the appropriate balance of imports and exports is crucial for a country. The importing and exporting activity of a country can influence a country's GDP, its exchange rate, and its level of inflation and interest rates.

1. Impact on GDP

In this equation, exports minus imports (X – M) equals net exports. When exports exceed imports, the net exports figure is positive. This indicates that a country has a trade surplus. When exports are less than imports, the net exports figure is negative. This indicates that the nation has a trade deficit. A trade surplus contributes to economic growth in a country. When there are more exports, it means that there is a high level of output from a country's factories and industrial facilities, as well as a greater number of people that are being employed in order to keep these factories in operation.

2. Impact on exchange rate

The relationship between a nation’s imports and exports and its exchange rate is complicated because there is a constant feedback loop between international trade and the way a country's currency is valued. The exchange rate has an effect on the trade surplus or deficit, which in turn affects the exchange rate, and so on. In general, however, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.

3. Impact on inflation and interest rates

Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate. Higher inflation typically leads to higher interest rates. Whether or not this results in a stronger currency or a weaker currency is not clear. Traditional currency theory holds that a currency with a higher inflation rate (and consequently a higher interest rate) will depreciate against a currency with lower inflation and a lower interest rate. According to the theory of uncovered interest rate parity, the difference in interest rates between two countries equals the expected change in their exchange rate. So if the interest rate differential between two different countries is two percent, then the currency of the higher- interest-rate nation would be expected to depreciate two percent against the currency of the lower-interest-rate nation.

FACTORS AFFECTING BALANCE OF TRADE

A country's balance of trade is defined by its net exports (exports minus imports) and is thus influenced by all the factors that affect international trade. These include factor endowments and productivity, trade policy, exchange rates, foreign currency reserves, inflation, and demand. A nation has a trade surplus if its exports are greater than its imports; if imports are greater than exports, the nation has a trade deficit.

1. Factor Endowments

Factor endowments include labour, land and capital. Labour describes characteristics of a country's workforce. Land describes the natural resources available, such as timber or oil. Capital resources include infrastructure and production capacity. The Heckscher-Ohlin model of international trade emphasizes the characteristics of a country's labour, land and capital to explain trade patterns. For example, a country with abundant unskilled labour produces goods requiring relatively low-cost labour, while a country abundant natural in resources is likely to export them. The skilled labour force can produce relatively more per person than the unskilled force, which in turn impacts the areas in which each can find a comparative advantage. The country with skilled labour might design complex electronics, while the unskilled labour force might specialize in basic manufacturing.

2. Trade Policies

Barriers to trade also impact a country's balance of exports and imports. Policies that restrict imports or subsidize exports impact the relative prices of those goods, making it more or less attractive to import or export. For example, agricultural subsidies might reduce farming costs, encouraging more production for export. Import quotas raise prices for imported goods, which reduces demand. Nations that restrict trade through high import tariffs and duties may run larger trade deficits than countries with open trade policies. This is because impediments to free trade may shut them out of export markets.

3. Exchange Rates, Foreign Currency Reserves, and Inflation

Exchange rates: A domestic currency that has appreciated significantly raises the cost of exported goods and can leave exporters priced out of global markets. This may pressure a nation's trade balance.

Foreign currency reserves: To compete effectively in international markets, a nation must have access to imported machinery that enhances productivity, which may be difficult if forex reserves are inadequate.

Inflation: If inflation is running rampant in a country, the price to produce a unit of a product may be higher than the price in a lower-inflation country. This would impact exports, thus affecting the trade balance.

4. Demand

Demand for particular products or services is an essential component of international trade. For example, the demand for oil impacts the price and the trade balance of oil- exporting and oil-importing countries alike. If a small oil importer faces a falling oil price, its overall imports might fall. The oil exporter, on the other hand, might see its exports fall. Depending on the relative importance of a particular good for a country, such demand shifts can have an impact on the overall balance of trade.

INDIA AND GLOBAL TRADE

India’s share in global trade (merchandise and services) was 2.1% (481.74 USD billion out of total 23,044 USD billion) for exports and 2.6% (600.62 USD billion out of total 23,112 USD billion) for imports in 2017. Exports have been growing on a regular basis since 2016-17 for almost three years and total exports reached a new peak of more than half a trillion dollars, for the first time in 2018-19. 

Government has taken following key measures for promotion of exports:

1. A new Foreign Trade Policy (FTP) 2015-20 was launched on 1st April 2015. The policy, inter alia, rationalised the earlier export promotion schemes and introduced two new schemes, namely Merchandise Exports from India Scheme (MEIS) for improving export of goods and ‘Services Exports from India Scheme (SEIS)’ for increasing exports of services. Duty credit scrips issued under these schemes were made fully transferable.
2. The Mid-term Review of the FTP 2015-20 was undertaken on 5th December, 2017. Incentive rates for labour intensive / MSME sectors were increased by 2% with a financial implication of Rs 8,450 crore per year.
3. A new Logistics Division was created in the Department of Commerce to co-ordinate integrated development of the logistics sector. India’srankin World Bank’s Logistics Performance Index moved up from 54 in 2014 to 44 in 2018.
4. Interest Equalization Scheme on pre and post shipment rupee export credit was introduced from 1.4.2015 providing interest equalisation at 3% for labour-intensive / MSME sectors. The rate was increased to 5% for MSME sectors with effect from 2.11.2018 and merchant exporters were covered under the scheme with effect from 2.1.2019.
5. A new scheme called Trade Infrastructure for Export Scheme (TIES) was launched with effect from 1st April 2017 to address the export infrastructure gaps in the country.

Key difficulties faced by the exporters are as follows:

1. Technical and non-technical barriers to trade such as Sanitary and Phyto- Sanitary (SPS) standards imposed on agricultural items and quality standards on manufactured goods.
2. Tariff advantages to the exporters of competing countries in key export markets due to trade agreements between their countries and destination countries/regions.
3. Higher logistics and financing costs for Indian exporters.

Government has formulated a detailed action plan which is updated regularly based on the feedback from the exporting community, the Export Promotion Councils and other industry associations. State Governments have also been requested to develop an Export Strategy for the State keeping in view the state specific opportunities and challenges. The Board of Trade and the Council for Trade Development and Promotion provide a platform for all the stakeholders, including State governments to discuss the issues impacting exports.

POLICY CHANGES IN 1991 AND THE IMPACT

The Finance Minister in his 1991 Union Budget speech explicitly stated that trade policy reform was an important part of the economic reform initiated by India in 1991. Trade policy reform since then is a journey that transformed not just India’s trade policy framework, but also the evolution of several domestic policies. Two-and-a-half decades ago, India was a country with very high tariffs, multiple and complex systems of control on both imports and exports, and exchange rate controls that had created an economic situation where “ease of doing business” was not a significant priority. Trade policy was considered as a tool of industrial policy within a system of extensive controls which created time-consuming multiple layers of decision-making and delays, and increased costs which affected trade, investment and the efficiency of domestic operations. The reform of this system initiated in 1991 was a huge task and required a clear specification of the path towards a more transparent and less complex system, with reduced controls and established less ad-hoc policy framework, as India moved towards more open markets.

Tariffs

While the main elements of tariff reform were specified in the 1991 Budget, this effort was supplemented by the report of an expert committee under Prof. Raja Chelliah. The paper provides a brief summary of this committee’s recommendations, which inter alia provided a roadmap for tariff reductions and simplification of the tariff regime. As mentioned above, some of the ideas in that Report are still unfinished business and are worth consideration. Supplemented by recommendations of the expert committee, India’s trade policy reform paved the road for a major reduction of average tariffs, tariff peaks, simplification of the tariff and quota regimes, and removal of several import restrictions. These changes reflected a larger vision of reform to enhance the efficiency of domestic industry, together with a number of other objectives such as promoting infant industry, exports, technological upgradation and food security.
In 1991, India’s peak tariffs were reduced to 150 per cent and over time, India’s peak tariffs have been brought down to 10 per cent ; the term “peak tariffs” in India refers to the tariff rate that applies in general to most tariff lines (nearly three-quarter tariff lines), and excludes agriculture tariffs. The highest agriculture tariff remains 150 per cent (on mainly alcohol), but this tariff applies to a very minuscule percentage of the overall tariff lines. Bulk of the tariff lines (86 per cent) are “non-agriculture”, where 90 per cent of the tariff lines are between zero and 10 per cent.
While the reduction in tariffs has been a large one since 1991, the actual impact on domestic producers was somewhat mitigated for quite some time due to the devaluation/depreciation of the domestic currency. The real effective exchange rate shows that despite the large fall in the nominal effective exchange rate, the competitive situation for India has not changed much.

Non-tariff measures

These include quantitative restrictions, antidumping measures, and sanitary phytosanitary (SPS) and technical barriers to trade (TBT) measures. Quantitative restrictions (QRs) are imposed not only for protectionist purposes, but also for objectives such as health and safety reasons, technical compatibility of requisite standards, moral reasons, environmental reasons, or to meet obligations under international agreements: these objectives are recognised as being “justifiable” under the WTO rules.
India has reduced its QRs over time from the complex and extensive regime of 1991 to one with much lower coverage, with simpler procedures and lower incidence. The QRs today are to mainly to meet the “justifiable” objectives, and the regime is more simple and transparent. However, as in the case of tariffs, the reform process still has scope for further improved governance with greater predictability and transparency. This is not unusual or specific to India.

Services Trade

Compared to goods, services trade policy issues and related disciplines have been considered much later in time. Services became significant in overall global trade, with the growth of international supply chains and improvements in communications and transport technology. It is noteworthy that a very important complementary policy for services is the corresponding regulatory regime. The growth of services trade has also meant an increasing role of regulatory policies (and thus of domestic policies) in trade. In addition, the discussion on services trade led to a wider framework encompassing different ways of carrying out international trade, including for example the service provider travelling to the importing market or FDI being made in the importing market to provide services exports. Several services contribute to improving competitiveness, with large multiplier impact on economic activities. Hence, effectively implementing policy reform on the policies discussed earlier in the context of goods, e.g. standards. Therefore, policies that improve the performance of services assume major importance.

Trade Facilitation

A very important trade policy development has been a shift in focus from trade restriction towards trade facilitation. This perspective is important in a world with growing levels of competitiveness and increasing significance of international value or supply chains, which require cost-effective and timely procedures for imports and exports. The most recent manifestation of this emphasis has been the Trade Facilitation Agreement (TFA) agreed at the WTO.Interestingly, India embarked on its journey to improve trade facilitations several years before trade facilitation became an important trade policy area in bilateral and multilateral discussions. After the TFA, however, India has intensified its efforts for implementing trade facilitation policy in a major co-ordinated manner. The paper covers these aspects, including the current efforts of India in this area.

Conclusion

There needs to be an emphasis on a need for adopting trade policies in a co-ordinated manner, to simplify procedures, make them more transparent, and reduce arbitrariness. In this process, policy makers need to consider trade policy and domestic policy in an integrated manner, keeping in mind the continuing evolution of trade policy, emergence of new market
conditions, and the growth of both formal and informal mechanisms which determine the opportunities and constraints in the global markets.
Further, the developments due to the emergence of disruptive technologies, evolution of social and sustainability considerations, and the tendency of policy issues to spill over into the practices of private sector lead firms in global value chains, imply that the policy maker has to not only work with a much wider agenda than earlier but also interact much more closely with the private sector than is the conventional practice.

IMPORT PROCEDURE IN INDIA

1. Obtaining import license and quota
   In all countries there are many government regulations to be followed. Sanction of the government is necessary. Importer has to apply to the controller of imports for getting necessary permission.
   Importer has to attach the following documents to his application form :-
   - Receipt which shows that import license fee has been paid.
   - Certificate from a Chartered Accountant showing the total value of goods to be imported.
   - Verification Certificate for income tax.
   An import license may be general or specific. A general license allows imports from any country. But a specific license allows imports from a specific country only. The importer also has to obtain an import quota certificate from the concerned authority. It mentions the maximum quantity of goods which can be imported.
   
   
2. Obtaining foreign exchange
   Before placing any order, the importer must apply to the Exchange Control Department (ECD) of RBI (India’s Central Bank) for the release of requisite foreign exchange. The importer should forward the application through his bank. The ECD verifies the application of the importer, and if found valid, sanctions the foreign exchange for the particular transaction.
   
   
3. Placing an order
   The importer may either place the order directly or through the indent house (Agent). In case of canalised items, he obtains the imports through the canalizing agency. (Canalisation means channelisation of goods through a government agency like MMTC). The importer cannot directly import such canalized items. They have to place an order with the canalizing agency who shall import and supply the same.
   
   
4. Dispatching letter of credit
   After getting the confirmation from the supplier regarding the supply of goods, the importer requests his bank to issue a Letter of credit in favour of the supplier. It can be defined as “an undertaking by the importer’s bank stating that payment will be made to the exporter if the required documents are presented to the bank”.
   
   
5. Appointing clearing and forwarding agents
   The importer makes arrangements to appoint clearing and forwarding agents to clear the goods from the customs. Since clearing of goods is a specialized job, it is better to appoint C & F agents.

6. Receipt of shipment device
   The importer receives the shipment advice from the exporter. The shipment advice states the date on which the goods are loaded on the ship. The shipment advice helps the importer to make arrangements for clearance of goods.

7. Receipts of documents
   The importer’s bank receives the documents from the exporter’s bank. The documents include bill of exchange, a copy of bill of lading, certificate of origin, commercial invoice, consular invoice, packing list, and other relevant documents. The importer makes payment to the bank (if not paid earlier) and collects the documents.

8. Bill of entry
   This is a document required in case of import of goods. It is like a shipping bill in case of exports. A Bill of Entry is the document testifying the fact that goods of the stated value and description in specified quantity are entering into the country from abroad. The customs office supplies this form which is prepared in triplicate. Three different colours are used to prepare the bill of entry .One copy is retained by the customs department, another is retained by port trust and the third is kept by the importer.

9. Delivery order
   The clearing agents obtain the delivery order from the office of the shipping company. The shipping company gives the delivery order only after payment of freight, if any.

10. Clearing of goods
    The clearing agent pays the necessary dock or port trust dues and obtains the port Trust Receipt in two copies. He then approaches the Customs House and presents one copy of Port Trust Receipt, and two copies of Bill of. Entry to the customs authorities. The customs officer endorses the Bill of Entry Forms and one copy of Bill of Entry is handed back to the importer. The importer then pays the customs duty and clears the goods. In case, the customs duty is not paid, then the goods are stored in the bonded warehouses. As and when the duty is paid, the goods are cleared from the docks.

11. Payment to clearing and forwarding agent
    The importer then makes the necessary payment to the clearing agent for his various expenses and fees.

12. Payment to exporter
    The importer has to make payment to the exporter. Usually, the exporter draws a bill of exchange. The importer has to accept the bill and make payment.

13. Follow up
    The importer then informs the exporter about the receipt of goods. If there are any discrepancies or damages to the goods, he should inform the exporter.

EXPORT PROCEDURE IN INDIA

In general, an export procedure flows as stated below:

1. Receipt of an Order
   The exporter of goods is required to register withvarious authorities such as the income tax department and Reserve Bank of India (RBI). In addition to this, the exporter has to appoint agents who can collect orders from foreign customers (importer). The Indian exporter receives orders either directly from the importer or through indent houses.

2. Obtaining License and Quota
   After getting the order from the importer, the Indian exporter is required to secure an export license from the Government of India, for which the exporter has to apply to the Export Trade Control Authority and get a valid license. You can get a license from here too. The quota is referred to as the permitted total quantity of goods that can be exported.

3. Letter of Credit
   The exporter of the goods generally ask the importer for the letter of credit, or sometimes the importer himself sends the letter of credit along with the order.

4. Fixing the Exchange Rate
   Foreign exchange rate signifies the rate at which the home currency can be exchanged with the foreign currency i.e. the rate of the Indian rupee against the American Dollar. The foreign exchange rate fluctuates from time to time. Thus, the importer and exporter fix the exchange rate mutually.

5. Foreign Exchange Formalities
   An Indian exporter has to comply with certain foreign exchange formalities under exchange control regulations. As per the Foreign Exchange Regulation Act of India (FERA), every exporter of the goods is required to furnish a declaration in the form prescribed in a manner. The declaration states:-

   I. The foreign exchange earned by the exporter on exports is required to be disposed of in the manner specified by RBI and within the specified period.
   II. Shipping documents and negotiations are required to be done through authorised dealers in foreign exchange. 
   III. The payment against the goods exported will be collected through only approved methods.

6. Preparation for Executing the Order
   The exporter should make required arrangements for executing the order:
   I. Marking and packing of the goods to be exported as per the importer’s specifications.
   II. Getting the inspection certificate from the Export Inspection Agency by arranging the pre-shipment inspection.

7. Formalities by a Forwarding Agent
   The formalities to be performed by the agent include –
   I. For exporting the goods, the forwarding agent first obtains a permit from the customs department.
   II. He must disclose all the required details of the goods to be exported such as nature, quantity, and weight to the shipping company.
   III. The forwarding agent has to prepare a shipping bill/order.

8. Bill of Lading
   The Indian exporter of the goods approaches the shipping company and presents the receipt copy issued by the master of the ship and in return gets the Bill of Lading. Bill of lading is an official receipt which provides the full description of the goods loaded on the ship and the name of the port of destination.

9. Shipment Advise to the Importer
   The Indian exporter sends shipment advice to the importer of the goods so that the importer gets informed about the dispatch of the goods. The exporter sends a copy of the packing list, a non-negotiable copy of the Bill of Lading, and commercial invoice along with the advice note. 

10. Presentation of Documents to the Bank
    The Indian exporter confirms that he possesses all necessary shipping documents namely; Marine Insurance Policy The Consular Invoice Certificate of Origin The Commercial Invoice The Bill of Lading Then the exporter draws a Bill of Exchange on the basis of the commercial invoice. The Bill of Exchange along with these documents is called Documentary Bill of Exchange. The exporter then hands over the same to his bank.

11. The Realisation of Export Proceeds
    In order to realise the proceeds of the export, the exporter of the goods has to undergo specific banking formalities. On submission of the bill of exchange, these formalities are initiated. Generally, the exporter receives payment in foreign exchange.

EXPORTS COMMODITY BASKET

1. Petroleum products
   The export sector of India has been greatly aided by oil-based products and giant crude oil companies like Hindustan Petroleum Corporation Limited (Bharat Petroleum), Reliance Petroleum, ONGC, ONGC, ONGC, Reliance Petroleum, Reliance Petroleum, and Bharat Petroleum. Although India is heavily dependent on oil imports for its economy, exports of oil-based products have helped it to a great extent.
   
   
2. Jewellery
   Jewellery can be defined as gold, gemstones, and other similar materials. India accounts for around 20% of global gold production. 75% of this amount is used to make jewellery. Banks and government policies support the jewellery industry so that it does not decline. Only 30% of Indian jewellery is exported to the United States. These countries include Hong Kong and Singapore, the UAE, Singapore, and Belgium.
   
   
3. Automobile
   From 2008 to 2013, the Indian automobile export sector has seen a rise of 17 per cent, one of the fastest economic growths that have ever taken place in the sector. Being one of the leading steel producers in the world, India invests largely in the automobile sector and its export.
   
   
4. Machinery
   There has been a 10.5 per cent increase in the export of heavy machinery from India. These include cars, pumps, heavy machines, building construction tools, agricultural equipment and so on.
5. Bio-chemicals 
   Manufacturing bio-chemicals is a nationwide business in India. The sector contributes hugely to the national economy and is an essential part of it. Manufacturers and exporters are spread all over the country. Research facilities have also supported this sector to a large extent.
   
   
6. Pharmaceuticals
   Being a research-based industry, the pharmaceuticals sector in India has seen huge growth over the past few decades. Major pharma industries such as J. B. Chemicals and Pharmaceuticals Limited, Suven Life Sciences Limited, Dr Reddy’s Laboratories, Aurobindo Pharma, Lupin, Ranbaxy, Sun Pharma, Zydus Cadila, Glowchem and Calyx play a huge role in promoting the sector to the world market.
   
   
7. Cereals
   India is one of the leading exporters of cereals and the second-largest producer of rice. Being an agriculture-driven country, India depends largely on its production of cereals and so do the importer countries such as Iran, Saudi Arabia, Indonesia, UAE and Bangladesh.
   
   
8. Iron and steel
   Before Independence, India used to depend on its import of iron and steel. But now, the country has gone through such an industrial growth that it has become the fourth-largest steel producer in the world. Steel tycoons such as TISCO, IISCO, Bhilai Iron and Steel Centre, and Visweswaraya Iron And Steel Limited play a major role in the iron and steel export from India.
   
   
9. Textile
   Textile is India’s trump card when it comes to exports. India tops the chart in jute production and also holds 63 per cent of the global market share in textiles and garments.
   
   
10. Electronics
    When it comes to manufacturing electronic equipment, India is still seen as an importing country. However, the export part of this sector thrives silently yet largely. India has the third-largest pool of electronic scientists and engineers and the domestic demand for electronic goods propels the industry to grow faster and stronger, making export all the more important.

IMPORTS COMMODITY BASKET

1. Oil
   Like most of other countries, India too gets its crude oil from the Middle- East, especially Saudi Arabia and Iraq. In the last decade, India's oil import has risen from around 65 million tonnes to almost 180 million tonnes! India is one of the most oil import dependent countries in the world.
   
   
2. Precious stone
   India is a unique country. Why? Because the No. 2 item in both the lists of top imports and exports of India is precious stones, gold in particular. Though the import rate has reduced by 9 per cent recently, India spends more than 60 billion dollars to buy jewels.
   
   
3. Electronics
   Half of the total import of electronic equipment to India comes from China. This is not news to us. Almost every other electronic device sold in India - big or small - are labelled as 'Made in China'. However, the country has progressed extensively in the sector and the import rate is going down. However, there still a long way to go!
   
   
4. Heavy machinery
   Industrial machines, engines, pumps are imported mainly from Japan and China. To have rapid industrial growth in India as per the vision of PM Modi, the country needs to be self-sufficient in the field of heavy machines.
   
   
5. Organic chemicals
   Ancient India was famous for its advancement in organic chemistry and use of herbal science. However, at present, the country depends on imported bio-chemicals. This also increases the cost of agricultural expenditure and thus affects the price of essential food items.
   
   
6. Plastics
   How often do we come across a billboard or a signage saying "Say No To Plastic Items"? Pretty often, right? But then again, the country's sixth most imported item is plastic. Now, every plastic item may not be unnecessary, but the use of the ones that can be stopped, should be! This will not save the environment but also strengthen the country's economy.
   
   
7. Animal and vegetable oil
   When it comes imports, India loves oil in all its forms. Oil is India's top priority, be it crude or edible. The amount of edible oil we import from other parts of the world has increased by almost 25 per cent in recent years.
   
   
8. Iron and Steel
   Though our country has a rich source of iron ore, it still depends upon imported iron and steel. However, the import rate of iron and steel and such metal products have reduced drastically in past few years.

BARRIERS TO TRADE IN INDIA

Import Licensing

India maintains a nontariff regulation on three categories of products: banned or prohibited items (e.g., tallow, fat, and oils of animal origin); restricted items that require an import license (e.g., livestock products and certain chemicals); and “canalized” items (e.g., some pharmaceuticals) importable only by government trading monopolies and subject to cabinet approval regarding import timing and quantity. India, however, often fails to observe transparency requirements, such as publication of timing and quantity restrictions in its Official Gazette or notification to WTO committees. For purposes of entry requirements, India has distinguished between goods that are new, and those that are second-hand, remanufactured, refurbished, or reconditioned. India allows imports of second-hand capital goods by the end users without an import license, provided the goods have a residual life of five years. India’s official Foreign Trade Policy categorize remanufactured goods in a similar manner to second-hand products, without recognizing that remanufactured goods have typically been restored to original working condition and meet the technical and safety specifications applied to products made from new materials.

Standards, testing, labelling & certification 

The Bureau of Indian Standards (BIS) established by the Indian Government under the BIS Act 2016 and is the National Standards Body of India. The Bureau functions under the Ministry of Consumer Affairs, Food & Public Distribution and is involved in the harmonious development of the activities of standardization, marking and quality certification of goods. Another agency, the Food Safety and Standards Authority of India (FSSAI), established through the food safety and standards act under the Ministry of Health and Family Welfare; along with the Office of Legal Metrology under the Ministry of Consumer Affairs, Food and Public Distribution; and the Department of Commerce under the Ministry of Commerce and Industries (MOCI), regulate food safety, standards, labelling and packaging requirements of food and agricultural products.

Anti-dumping and countervailing measures

Anti-dumping and countervailing measures are permitted by the WTO Agreements in specified situations to protect the domestic industry from serious injury arising from dumped or subsidized imports. India imposes these from time-to-time to protect domestic manufacturers from dumping. India’s implementation of its antidumping policy has, in some cases, raised concerns regarding transparency and due process. In recent years, India seems to have aggressively increased its application of the antidumping law.

Export subsidies and domestic support

Several export subsidies and other domestic support is provided to several industries to make them competitive internationally. Export earnings are exempt from taxes and exporters are not subject to local manufacturing tax. While export subsidies tend to displace exports from other countries into third country markets, the domestic support acts as a direct barrier against access to the domestic market. The Indian government’s Foreign Trade Policy (FTP) 2015-2020 announced on April 1, 2015 is primarily focused on increasing India’s exports of goods and services to raise India’s share in world exports from 2 to 3.5 percent. India maintains several export subsidy programs, including exemptions from taxes for certain

export-oriented enterprises and for exporters in Special Economic Zones. Numerous sectors (e.g., textiles and apparel, paper, rubber, toys, leather goods, and wood products) receive various forms of subsidies, including exemptions from customs duties and internal taxes, which are tied to export performance. India not only continues to offer subsidies to its textiles and apparel sector to promote exports, but it has also extended or expanded such programs and even implemented new export subsidy programs. As a result, the Indian textiles sector remains a beneficiary of many export promotion measures (e.g., Export-Oriented Units, Special Economic Zones, Export Promotion Capital Goods, Interest Credit Schemes, Focus Product, and Focused Market Schemes). The GOI in July 2016 further increased the subsidy for the garment sector to boost employment generation in addition to providing for refund of state levies.

Service barriers

Services in which there are restrictions include: insurance, banking, securities, motion pictures, accounting, construction, architecture and engineering, retailing, legal services, express delivery services and telecommunication. The Indian government has a strong ownership presence in major services industries such as banking and insurance. Foreign investment in businesses in certain major services sectors, including financial services and retail, is subject to limitations on foreign equity. Foreign participation in professional services is significantly restricted, and in the case of legal services, prohibited entirely.

Other barriers 

Local Content requirements, Export Duties and Transparency continue to be other barriers for trade.

In 2010, India initiated the Jawaharlal Nehru National Solar Mission (JNNSM), which currently aims to bring 100,000 megawatts of solar-based power generation online by 2022 as well as promote solar module manufacturing in India. Under the JNNSM, India imposes certain local content requirements (LCRs) for solar cells and modules and requires participating solar power developers to use solar cells and modules made in India to enter into long-term power supply contracts and receive other benefits from the Indian

government. The United States challenged these requirements through the World Trade Organization (WTO) dispute settlement system. In February 2016, a WTO panel found India’s LCRs inconsistent with multiple WTO requirements. These findings were affirmed by the Appellate Body on September 16, 2016, and the DSB adopted the Appellate Body and Panel reports at a special meeting of the DSB on October 14, 2016. On December 19, 2017, the United States requested authorization from the DSB to suspend

concessions or other obligations on the grounds that India had failed to comply with the DSB recommendations within the “reasonable period of time” that the parties agreed to. The United States’ request was referred to arbitration. On January 23, 2018, India requested the establishment of a compliance panel, asserting that it had complied with the DSB recommendations. The arbitration and compliance panel proceedings are ongoing. 

India has steadily increased export duties on iron ore and its derivatives. This includes export duty of 30 percent, ad valorem export duty on iron ore pellets of five percent, an export duty on iron ore containing less than 58 percent iron of 10 percent, and an export duty on chromium ore of 30 percent ad valorem. In recent years certain Indian states and stakeholders have increasingly pressed the central government to ban exports of iron ore. To improve availability of iron ore for the local steel producers, the GOI in March 2016 enhanced and unified the rate of export duty for all types of iron ore (other than pellets) at 20 percent; earlier a 15 percent export tax was applicable on lumps and 5 percent on fines. India’s export duties impact international markets for raw materials used in steel production. In addition to the steel-related export duties, India’s March 2017 budget also imposed a 15 percent duty on exports of aluminium ores, including laterite. India has also maintained, since February 2012, a 30 percent ad valorem duty on exports of chromium ore. 

Lack of transparency with respect to new and proposed laws and regulations affecting traders remains a problem due to a lack of uniform notice and comment procedures and inconsistent notification of these measures to the WTO. This in turn inhibits the ability of traders and foreign governments to provide input on new proposals or to adjust to new requirements. In 2014, India’s Ministry of Law and Justice issued a policy on pre-legislative consultation, which was to be applied by all Ministries and Departments of the Central Government before any  legislative proposal was to be submitted to the Cabinet for its consideration and approval. The policy also required the central government entities to publish draft legislation or a summary of information concerning the proposed legislation for a minimum period of 30 days. Issuance through electronic media was also encouraged in the policy, as were public consultations. However, despite U.S. requests, the Indian government has provided no information on the implementation of the policy, other than to clarify it is only intended to apply to draft legislation, not regulations or tariff-setting not. U.S. stakeholders continue to report new requirements that are issued with no or inadequate public notice and consultation or without WTO notification. This lack of transparency imparts a lack of predictability in the Indian marketplace, negatively affecting the ability of U.S. companies to enter or operate in the Indian market. The United States continues to raise our concerns regarding uniform notice and comment procedures with the government of India both bi-laterally in the Trade Policy Forum (TPF) and multi-laterally in the WTO and other fora.

INDIAS TRADING PARTNERS

The US surpassed China to become India's top trading partner in 2021-22, reflecting strengthening economic ties between the two countries. According to the data of the commerce ministry, in 2021-22, the bilateral trade between the US and India stood at $119.42 billion as against $80.51 billion in 2020-21. Exports to the US increased to $76.11 billion in 2021-22 from $51.62 billion in previous fiscal year, while imports rose to $43.31 billion as compared to about $29 billion in 2020-21.

During 2021-22, India's two-way commerce with China aggregated at $115.42 billion as compared to $86.4 billion in 2020-21, the data showed. Exports to China marginally increased to $21.25 billion last fiscal year from $21.18 billion in 2020-21, while imports jumped to $94.16 billion from about $65.21 billion in 2020-21. Trade gap rose to $72.91 billion in 2021-22 from $44 billion in previous fiscal year.

Rakesh Mohan Joshi, Director of the Indian Institute of Plantation Management (IIPM), Bangalore, too said that India is home to 1.39 billion people with the world's third largest consumer market and the fastest growing market economy with unparalleled demographic dividend provides enormous opportunities for the US and Indian firms for technology transfer, manufacturing, trade and investment.

"Major export items from India to the US include petroleum polished diamonds, pharmaceutical products, jewellery, light oils and petroleum, frozen shrimp, made ups etc. whereas major imports from the US include petroleum, rough diamonds, liquified natural gas, gold, coal, waste and scrap, almonds etc," Joshi said.

America is one of the few countries with which India has a trade surplus. In 2021-22, India had a trade surplus of $32.8 billion with the US.

The data showed that China was India's top trading partner from 2013-14 till 2017-18 and also in 2020-21. Before China, the UAE was the country's largest trading partner.

In 2021-22, the UAE with $72.9 billion, was the third largest trading partner of India. It was followed by Saudi Arabia ($42,85 billion), Iraq ($34.33 billion) and Singapore ($30 billion).

WORLD TRADE ORGANISATION

Created in 1995, the World Trade Organization (WTO) is an international institution that oversees the rules for global trade among nations. It superseded the 1947 General Agreement on Tariffs and Trade (GATT) created in the wake of World War II. The WTO is based on agreements signed by a majority of the world’s trading nations. The main function of the organization is to help producers of goods and services, as well as exporters and importers, protect and manage their businesses. As of 2021, the WTO has 164 member countries, with Liberia and Afghanistan the most recent members, having joined in July 2016, and 25 “observer” countries and governments.

Understanding the World Trade Organization (WTO)

The WTO is essentially an alternative dispute or mediation entity that upholds the international rules of trade among nations. The organization provides a platform that allows member governments to negotiate and resolve trade issues with other members. The WTO’s main focus is to provide open lines of communication concerning trade among its members. The WTO has lowered trade barriers and increased trade among member countries. It also has also maintained trade barriers when it makes sense to do so in the global context. The WTO attempts to mediate between nations in order to benefit the global economy. Once negotiations are complete and an agreement is in place, the WTO offers to interpret the agreement in case of a future dispute. All WTO agreements include a settlement process that allows it to conduct neutral conflict resolution.2

WTO Leadership

On Feb. 15, 2021, the WTO’s General Council selected two-time Nigerian finance minister Ngozi Okonjo-Iweala as its director-general. She is the first woman and the first African to be selected for the position. She took office on March 1, 2021, for a four-year term. No negotiation, mediation, or resolution would be possible without the foundational WTO agreements. These agreements set the legal ground-rules for international commerce that the WTO oversees. They bind a country’s government to a set of constraints that must be observed when setting future trade policies.

The agreements protect producers, importers, and exporters while encouraging world governments to meet specific social and environmental standards.

Why Is the World Trade Organization Important?

The World Trade Organization (WTO) is the body that keeps global trade running smoothly. It oversees the rules and mediates disputes among its member nations. It now has 164 member nations and 25 observer nations (out of a total 195 nations in the world).

WHAT DOES THE WTO DO

While the WTO is driven by its member states, it could not function without its Secretariat to coordinate the activities. The Secretariat employs over 600 staff, and its experts — lawyers, economists, statisticians and communications experts — assist WTO members on a daily basis to ensure, among other things, that negotiations progress smoothly, and that the rules of international trade are correctly applied and enforced.

Trade negotiations

The WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They include individual countries’ commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets. They set procedures for settling disputes. These agreements are not static; they are renegotiated from time to time and new agreements can be added to the package. Many are now being negotiated under the Doha Development Agenda, launched by WTO trade ministers in Doha, Qatar, in November 2001.

Implementation and monitoring

WTO agreements require governments to make their trade policies transparent by notifying the WTO about laws in force and measures adopted. Various WTO councils and committees seek to ensure that these requirements are being followed and that WTO agreements are being properly implemented. All WTO members must undergo periodic scrutiny of their trade policies and practices, each review containing reports by the country concerned and the WTO Secretariat.

Dispute settlement

The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly. Countries bring disputes to the WTO if they think their rights under the agreements are being infringed. Judgements by specially appointed independent experts are based on interpretations of the agreements and individual countries’ commitments.

Building trade capacity

WTO agreements contain special provision for developing countries, including longer time periods to implement agreements and commitments, measures to increase their trading opportunities, and support to help them build their trade capacity, to handle disputes and to implement technical standards. The WTO organizes hundreds of technical cooperation missions to developing countries annually. It also holds numerous courses each year in Geneva for government officials. Aid for Trade aims to help developing countries develop the skills and infrastructure needed to expand their trade.

Outreach

The WTO maintains regular dialogue with non-governmental organizations, parliamentarians, other international organizations, the media and the general public on various aspects of the WTO and the ongoing Doha negotiations, with the aim of enhancing cooperation and increasing awareness of WTO activities.

EVOLVING STRUCTURE OF GLOBAL TRADE 

A.DIFFUSION OF KEY PLAYERS IN GLOBAL TRADE

Emerging market economies have moved from peripheral players to major centres of global trade. In the early 1970s, trade was largely confined to a handful of advanced economies, notably the United States, Germany, and Japan, which together accounted for more than a third of global trade. By 1990, the global trading landscape had become more diversified to include several EMEs, especially in East Asia. By 2010, China became the second largest trading partner after the United States, overtaking Germany and Japan. China’s emergence reflects its rapid industrialization and growing trade openness—trade was 57 percent of GDP in 2008 in China, almost triple the ratio of the United States.

Growth in trade was strongest for Europe and Asia. The expansion in global trade took place against growing regional concentration. Whereas interregional trade was virtually unchanged at about 12 percent of world GDP between 1980 and 2009, growth in intraregional trade was particularly strong in Europe and Asia.

The structure of trade has been characterized by a rising share of higher- technology goods. The contribution of high-technology and medium-high-technology exports such as machinery and transport equipment increased, whereas that of lower-technology products such as textiles declined. Technology-intensive export structures generally offer better prospects for future economic growth. Trade in high-technology products tends to grow faster than average, and has larger spill over effects on skills and knowledge-intensive activities. The process of technological absorption is not passive but rather “capability” driven and depends more on the national ability to harness and adapt technologies rather than on factor endowments.

In this setting, country-specific policies for technology learning and technology import, including those aimed at attracting foreign direct investment (FDI), can create a comparative advantage between countries with otherwise similar endowments of labour, capital, or skills.

The changes in global and regional trade patterns were driven first by trade liberalization, then by vertical specialization and income convergence.

• Trade liberalization. A key factor has been the multilateral and bilateral trade liberalization since World War II, which resulted in a significant decline in trade barriers (Krugman, 1995). Among major western European and North American countries, average tariffs fell from 15 percent to 4 percent during 1952–2005, with the bulk of this decline occurring during the 1950s and 1960s (World Trade Organization [WTO], 2007). Tariffs increased or remained very high until the 1980s in many major developing countries but have since come down sharply as well.
  
  
• Increase in vertical specialization in production. Along with lower trade barriers, technology-led declines in transportation and communication costs also allowed fragmentation of production processes along vertical trading networks that stretch across several countries. Technological advancement in communications reduces the cost of oversight and coordination, making it easier to separate different stages of production across countries. In addition, lower tariffs and transportation  costs facilitate the flow of intermediate goods across countries in the global supply chain, as each country specializes in particular stages of a good’s production sequence. Work by Hummels, Ishii, and Yi (2001) and staff estimates show that the foreign content imbedded in gross exports, also referred to as foreign value added (FVA) exports as opposed to domestic value added (DVA) exports, has almost doubled since 1970, to 33 percent in 2005. Growth in vertical specialization has accelerated more recently, increasing by more than 20 percent in the 10-year period up to 2005.
  
  
• Convergence in income levels. As countries converged in income levels and in the composition of their factor endowments, the volume of trade in relation to GDP increased (Helpman, 1987; Hummels and Levinsohn, 1995), and took the form of intraindustry trade, as firms produced differentiated goods with increasing returns-to- scale technology. Intraindustry trade as a share of overall trade has increased steadily over time and is highest for products such as machinery, chemicals, and manufacturers. Countries that experienced higher changes in intraindustry trade between 1985 and 2009 are those integrated in a supply chain, such as China, Thailand, and Mexico

B. GROWING TRADE INTERCONNECTEDNESS

Growth in trade interconnectedness has increased the cross-border transmission of shocks through the trade channel. Table 2 presents countries with systemically important trade sectors identified using network analysis.4 Findings suggest several important trends underlying the global trade network over the past decade. First, there has been a marked shift in the relative rankings of individual jurisdictions, with China moving to first place in 2009 up from ninth in 1999. Second, China has emerged as a major systemically important trading centre along with the United States, gaining prominence not only in terms of size but also by increasing the number of its significant trading partners. Third, there has been a marked shift in the roles of China and Japan as strategic export destinations, with China surpassing Japan as a more significant regional and global consumer. Finally, European countries have retained their importance as “central” in the global trade network, owing more to their interconnectedness than size.

There is strong overlap between countries with trade and financial sectors of systemic importance. Comparing the findings on trade interconnectedness with those on financial interconnectedness using the same methodology suggests an almost perfect overlap between the top 25 jurisdictions with systemic financial sectors and the top 25 jurisdictions with systemic trade sectors in 2009 . The only exceptions are Luxembourg and Ireland, whose systemic importance is limited only to the financial sector, and Malaysia and Thailand, whose systemic importance is limited only to the trade sector. Jurisdictions hosting both systemic trade and financial sectors would seem to be the natural focus of risk-based surveillance on cross- border spill overs and contagion. The analysis underscores that these jurisdictions display the strongest intersectoral interconnectedness to the global economy. As such, they have the highest potential for transmitting disturbances to other jurisdictions or to systemic stability via either the trade or financial channel or indeed both channels simultaneously. These jurisdictions would thus seem to warrant particular attention and further analysis on the risks associated with their activities, especially when carried out through systemically important financial institutions and nonfinancial corporations.

C. GROWING ROLE OF GLOBAL SUPPLY CHAINS

Vertical specialization has increased since the mid-1990s. The increase has been particularly pronounced for China (where the share of imported content increased by 12 percentage points) and for Germany and Japan (7 percentage points), with the emergence of global supply chains contributing significantly to their rise as major exporting countries. In comparison, the increase in imported content has been smaller for the United States. Among the group of advanced economies, the share of foreign content in gross exports is lowest for the United States, even if foreign content in Germany’s exports from the euro area is treated as part of DVA.

Vertical specialization has been associated with regional concentration of trade. The significant increase in FVA content of exports between 1995 and 2005 suggests that both China and Germany’s exports have gained from integration within their regional supply chains. Both countries play very different roles though—the former as a downstream assembly centre and the latter as an upstream hub. China’s exports have high content of FVA that is from Asia: more than half of FVA is from the region, including other east Asian (OEA) economies. In Germany, most of the FVA is coming from other EU countries, including EU accession countries. About 70 percent of FVA in exports of EU accession countries is from the advanced euro area countries, Russia, or European Free Trade Association (EFTA) countries.

Advanced economies tend to be upstream in the global supply chain, whereas EMEs tend to be further downstream. Estimates from Koopman and others (2010) provide a comprehensive picture of global supply chains at the aggregate level and highlight two interesting features. First, compared to advanced economies, EMEs have relatively large imported contents in their exports Second, EMEs tend to have a smaller share of indirect exports that are sent to third countries. The ratio of these two measures provides a useful summary of a country’s position in the global supply chain, confirming the downstream position of EMEs in supply chains.

The relative downstream position of some EMEs, including China, reflects an important role of processing trade. Exports of many EMEs stem from lower value added production processes that largely use imported intermediates to assemble final goods for exports. Such processing trade accounts for a significant share of exports from China, which, together with many other Asian EMEs, serves as a downstream hub in the Asian supply chain. Mexico has a somewhat similar role, owing to specialized duty free assembly plants that use imported intermediates and re-export final goods back to the United States. The accession of Eastern European countries with lower production costs in the European Union has also resulted in increased outsourcing of production away from the advanced EU countries.

Regional supply chains in Asia, NAFTA, and Europe can be distinguished along two key features. The first is the extent of dependence on a regional power house. The Asian supply chain extends across several countries, with goods-in-process crossing borders several times, including through the hub (Japan), before reaching their final destination (Table 4). For instance, about 15 percent of Japanese value added embodied in Chinese products goes FVA in other regions is imported directly from the hub—the United States in NAFTA and EU15 in Europe. The second feature relates to the extent of processed value added flowing back to the hub. A significant amount of U.S. value-added (and EU15 value added to a lesser extent) returns home after further processing abroad, which is not necessarily the case for Japan. Processing trade in Asia therefore relies heavily on the region as a whole.

D. PAST TRENDS AND IMPLICATIONS FOR FUTURE OUTLOOK

The integration of rapidly growing EMEs is likely to induce a gradual shift in the sources of global demand away from advanced economies. With China overtaking Japan as the second largest economy in the world in 2010, East Asian countries are likely to emerge as the largest trading bloc by 2015, surpassing NAFTA and the euro area. Global supply chains have been an important factor in this trend and a country’s position along the supply chain could have important implications for trading patterns in the future.

The emergence of global supply chains may have also changed the way trade responds to relative price changes. Higher imported content in exports is likely to lower the sensitivity of trade to changes in the exchange rate. For instance an appreciation of the domestic currency against all trading partners implies that while exports become more expensive, imported intermediates also become cheaper, mitigating the impact of relative price changes on trade flows (Koopman, Wang, and Wei, 2008). Advanced countries whose exports tend to be concentrated in medium-high-technology goods are therefore likely to be more sensitive to relative price changes because of higher DVA, whereas those of EMEs are likely to be less sensitive given higher FVA in their exports.

Global supply chains may also result in closer relationships between producers in different countries and higher adjustment costs. Although this may further dampen the impact of (small) relative price changes on trade flows, it may also represent a source of vulnerability. The recent earthquake in Japan provides for a real life test of the resilience of supply chains to disruptions in production, especially in an upstream country. And although the disruption is likely to prove temporary, it may nonetheless lead to a rethink of the “just-in-time” production framework underlying global supply chains, especially the Asian one.

EFFECT OF PANDEMIC ON GLOBAL SUPPLY CHAINS

The COVID-19 pandemic has posed significant challenges for supply chains globally. Multiple national lockdowns continue to slow or even temporarily stop the flow of raw materials and finished goods, disrupting manufacturing as a result. However, the pandemic has not necessarily created any new challenges for supply chains. In some areas, it brought to light previously unseen vulnerabilities, and of course, many organizations have suffered staff shortages and losses due to COVID-19. But overall, it has accelerated and magnified problems that already existed in the supply chain.

The following are some findings from a survey that Ernst & Young LLP (EY US) conducted in late 2020. The respondents were 200 senior-level supply chain executives at organizations across many sectors, including consumer products, retail, life sciences, industrial products, automotive, and high-tech companies in the United States with over US$1b in revenues.

In the aftermath of severe disruption from the COVID-19 pandemic, the survey found that enterprises in the US plan to shake up their supply chain strategies to become more resilient, collaborative, and networked with customers, suppliers, and other stakeholders. To do that, they will increase investment in supply chain technologies like AI and robotic process automation while retraining workers.

The pandemic had substantial negative effects on supply chains

Certain sectors fared worse than others, but some life sciences companies reported few

effects.

The COVID-19 pandemic was a global disruption across trade, finance, health and education systems, businesses and societies like few others in the past 100 years. It is no surprise then that only 2% of companies who responded to the survey said they were fully prepared for the pandemic. Serious disruptions affected 57%, with 72% reporting a negative effect (17% reported a significant negative effect, and 55% mostly negative). Often in uncertain economic environments, companies slow their technology investments to a trickle. But during the COVID-19 pandemic, 92% did not halt technology investments. This speaks to the value of a digital supply chain in helping enterprises navigate disruptive forces and respond faster to volatile supply and demand.

There were some clear winners by industry during the pandemic, with 11% reporting positive effects, including increased customer demand (71%) and bringing new products to market (57%). These companies were mostly in the life sciences sector and the positive effects may be largely because the products they produce are essential. The pandemic also required some life sciences companies to double down on creating essential new products such as COVID- 19 tests or vaccines. Other sectors, particularly consumer products, couldn’t keep products on the shelves in the early days of the pandemic since toilet paper, canned goods, flour and other staples were in high demand.

Some sectors were hit particularly hard, however. Among survey respondents, all automotive and nearly all (97%) industrial products companies said the pandemic has had a negative effect on them. In addition, 47% of all companies reported the pandemic disrupted their workforce. While many employees were asked to work from home, others — especially in factory settings — had to adapt to new requirements for physical spacing, contact-tracing and more personal protective equipment (PPE). Industrial products and high-tech manufacturing companies are investing overwhelmingly in technology to reduce employee exposure to COVID-19 in more labour-intensive industries. These are just a few examples of changes

affecting supply chains across various sectors.

Greater supply chain visibility, efficiency and resilience are top of mind.

GLOBAL SUPPLY CHAINS IN A POST-PANDEMIC WORLD

When the Covid-19 pandemic subsides, the world is going to look markedly different. The supply shock that started in China in February and the demand shock that followed as the global economy shut down exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere. Temporary trade restrictions and shortages of pharmaceuticals, critical medical supplies, and other products highlighted their weaknesses. Those developments, combined with the U.S.-China trade war, have triggered a rise in economic nationalism. As a consequence of all this, manufacturers worldwide are going to be under greater political and competitive pressures to increase their domestic production, grow employment in their home countries, reduce or even eliminate their dependence on sources that are perceived as risky, and rethink their use of lean manufacturing strategies that involve minimizing the amount of inventory held in their global supply chains.

Yet many things are not going to change. Consumers will continue to want low prices (especially in a recession), and firms won’t be able to charge more just because they manufacture in higher-cost home markets. Competition will ensure that. In addition, the pressure to operate efficiently and use capital and manufacturing capacity frugally will remain unrelenting.

The challenge for companies will be to make their supply chains more resilient without weakening their competitiveness. To meet that challenge, managers should first understand their vulnerabilities and then consider a number of steps—some of which they should have taken long before the pandemic struck.

1. Uncover and Address the Hidden Risks
   Modern products often incorporate critical components or sophisticated materials that require specialized technological skills to make. It is very difficult for a single firm to possess the breadth of capabilities necessary to produce everything by itself. Consider the growing electronics content in modern vehicles. Automakers aren’t equipped to create the touchscreen displays in the entertainment and navigation systems or the countless microprocessors that control the engine, steering, and functions such as power windows and lighting. Another more arcane example is a group of chemicals known as nucleoside phosphonamidites and the associated reagents that are used for creating DNA and RNA sequences. These are essential for all companies developing DNA- or mRNA-based Covid-19 vaccines and DNA-based drug therapies, but many of the key precursor materials come from South Korea and China.
   
   Manufacturers in most industries have turned to suppliers and subcontractors who narrowly focus on just one area, and those specialists, in turn, usually have to rely on many others. Such an arrangement offers benefits: You have a lot of flexibility in what goes into your product, and you’re able to incorporate the latest technology. But you are left vulnerable when you depend on a single supplier somewhere deep in your network for a crucial component or material. If that supplier produces the item in only one plant or one country, your disruption risks are even higher.
   
   
2. Identify your vulnerabilities.
   Understanding where the risks lie so that your company can protect itself may require a lot of digging. It entails going far beyond the first and second tiers and mapping your full supply chain, including distribution facilities and transportation hubs. This is time-consuming and expensive, which explains why most major firms have focused their attention only on strategic direct suppliers that account for large amounts of their expenditures. But a surprise disruption that brings your business to a halt can be much more costly than a deep look into your supply chain is.
   
   
3. Diversify your supply base.
   The obvious way to address heavy dependence on one medium- or high-risk source (a single factory, supplier, or region) is to add more sources in locations not vulnerable to the same risks. The U.S.-China trade war has motivated some firms to shift to a “China plus one” strategy of spreading production between China and a Southeast Asian country such as Vietnam, Indonesia, or Thailand. But regionwide problems like the 1997 Asian financial crisis or the 2004 tsunami argue for broader geographic diversification.
   
   Managers should consider a regional strategy of producing a substantial proportion of key goods within the region where they are consumed. North America might be served by shifting labour-intensive work from China to Mexico and Central America. To supply Western Europe with items used there, companies could increase their reliance on eastern EU countries, Turkey, and Ukraine. Chinese firms that want to protect their global market share are already looking to Egypt, Ethiopia, Kenya, Myanmar, and Sri Lanka for low-tech, labour-intensive production.
   
   
4. Hold intermediate inventory or safety stock.
   If alternate suppliers are not immediately available, a company should determine how much extra stock to hold in the interim, in what form, and where along the value chain. Of course, safety stock, like any inventory, carries with it the risk of obsolescence and also ties up cash. It runs counter to the popular practice of just-in-time replenishment and lean inventories. But the savings from those practices have to be weighed against all the costs of a disruption, including lost revenues, the higher prices that would have to be paid for materials that are suddenly in short supply, and the time and effort that would be required to secure them.
   
   
5. Take Advantage of Process Innovations
   As firms relocate parts of their supply chain, some might ask their suppliers to move with them, or they might bring some production back in-house. Either course— transplanting a production line or setting up a new one—is an opportunity to make major process improvements. This is because as part of the change, you can unfreeze your organizational routines and revisit design assumptions underpinning the original process. (One challenge for companies with existing production lines is that when those assets are fully depreciated, executives may be tempted to retain them rather than invest in newer, more competitive plants and equipment: Since the depreciation expense is no longer factored into the calculated cost of production, the marginal cost of boosting production at a plant with idle capacity is lower.)

TRADE POLICY IMPLICATIONS OF GLOBAL VALUE CHAINS

The traditional view of international trade is that each country produces goods and offers services that are exported as final products to consumers abroad. However, in today’s global economy, this type of trade only represents around 30% of all trade in goods and services. In reality, about 70% of international trade today involves global value chains (GVCs), as services, raw materials, parts, and components cross borders – often numerous times. Once incorporated into final products they are shipped to consumers all over the world. Exports from one country to another often involve complex interactions among a variety of domestic and foreign suppliers. Even more than before, trade is determined by strategic decisions of firms to outsource, invest, and carry out activities wherever the necessary skills and materials are available at competitive cost and quality.

For example, a smart phone assembled in China might include graphic design elements from the United States, computer code from France, silicone chips from Singapore, and precious metals from Bolivia. Throughout this process, all countries involved retain some value and benefit from the export of the final product. But much of this value added throughout the international supply chain is invisible in traditional trade statistics, which attribute the full value of a good or service to the last country in the chain that finalised production.

Better measurement leads to better policies

To begin providing the evidence needed to respond to policy questions raised by the growing importance of GVCs for trade and investment, the OECD launched an initiative to measure trade in value added (TiVA) terms to provide a more accurate view of the underlying economic importance of trade. With TiVA, we are able to better identify where value is added along the supply chain, to estimate where income and jobs are created, and to provide a new perspective on bilateral trade imbalances. This is a critical undertaking to establish a better understanding of the links between trade and jobs. In a world of GVCs, trade policy cannot solely focus on impediments to trade with direct trade partners. The whole value chain and bottlenecks upstream and downstream among third countries have to be considered in order to boost exports and improve economic performance.

Countries at all levels of development can benefit from engaging in global value chains

For developing countries seeking to enter or engage in GVCs, there can be pressure to move up the value chain into higher value-adding activities. But the gains from participating in GVCs can come from any stage of the value chain: what matters is doing more of what you’re good at. That is, countries that become efficient at the assembly or production stage can generate greater total value from becoming a globally competitive supplier of these activities, than they can by carrying out higher value-adding activities in which they are less competitive. Ultimately, what actually matters is the total value that the economic activities within the value chain can generate.

From a policy perspective then, the focus should be on the total value that firms are generating and not the share value-added that is being performed domestically. In Viet Nam, for example, the share of domestic value added in exports fell from 64% to 53% between 2005 and 2016, but at the same time, the total domestic value-added exported was multiplied by 4. So Viet Nam gained more and exported more overall.